Comment by jasode | Hacker News Reader

Comment by jasode | Hacker News Reader

Parent Full thread

>"Growth" is now one of my most hated overused business lingo, after "innovation". Is it too naive to hope that this pandemic will make us collectively question the value of creeds like growth for growth's sake?

The "growth for growth's sake" is a thought-stopping meme. Let's unpack why that's an inaccurate reason for why companies do what they do and also why people who don't even work at those companies also care about growth.

The commenter you responded mentioned Netflix and "growth". Remember that Netflix went public in 2002 with an IPO.

When any company sells shares of ownership to investors, they're making a deal with society that if you buy their stock, your money will "grow". For investors' shares to become more valuable, Netflix has to grow new revenue, grow new profits, grow new markets, grow new products, etc. Why do so many public investors (and the so-called "investors" includes your grandparents' pensions, teachers/firemen retirements, etc) care about their money "growing"?!? Because they want to protect their future purchasing power. (My previous comment about this: https://news.ycombinator.com/item?id=15728480)

On other hand, if a family restaurant wants to just open one location with 20 tables and a payroll of 10 workers and just be a stable business that never grows, they wouldn't be able to sell public stock because nobody would buy it. There's nothing wrong with being a company that never grows -- but that's not the deal Netflix made with society.

So to rewrite your question a different way which gets at the root of where the motivation of "growth" comes from... Are we questioning the value of companies "going public"? Or are we questioning the ideology of fiat-money "inflation"? How do we make your grandparents pensions not care about "growth"?!? That's very difficult to solve!

There are also non-public entities that also want "growth". Countries like growth because it raises the standard-of-living for their citizens. Some small private businesses like some limited-scale growth because the owners like the challenges of running bigger business (e.g. expand to 5 restaurant locations instead of just 1.)

Even though the pandemic has shown the benefits of less smog in Los Angeles because of less economic activity, it still has not removed the root of human reasons for desiring "growth".

Shouldn't dividends make up for any slowdown in growth? If I buy a share in Netflix and instead of the share price rising I get instead a dividend payment, I'd be fine with that, right?

>Shouldn't dividends make up for any slowdown in growth? If I buy a share in Netflix and instead of the share price rising I get instead a dividend payment, I'd be fine with that, right?

Not really. To riff on the old saying, "money doesn't grow on trees", we can also say "dividends don't grow on trees."

Where do dividends come from? From profits. But where do profits come from? In accounting lingo, we say profits come from "revenue minus costs" but to restate that in human action terms, we notice that profits come from Company X's purposeful activities that are desired by customers that choose to spend money with Company X instead of Company Y. Therefore, dividends are not guaranteed and in the hyper-competitive business sector Netflix operates, it requires growth to pay them.

If we mentally substitute "Blockbuster Inc" for "Netflix" in your dividend suggestion: "Can't shareholders just be happy with Blockbuster paying dividends instead of worrying about growth?"

... we'll see the "dividends instead of growth" won't work. In 2002, Blockbuster started losing money to upstart Netflix. If you look at Blockbusters historical stock prices[1], you'll see they started falling towards $0 because of repeated annual losses. Netflix was growing and Blockbuster was not. With accounting losses, Blockbuster has no profits and thus, no dividends to pay. Blockbuster eventually went bankrupt. Blockbuster did try to "grow" but it wasn't enough. No only do you have to grow as part of business strategy, you have to grow correctly with smart bets.

With Blockbuster as a case study, we can see that suggesting "Why can't Netflix shareholders be happy with dividends instead of growing?" -- will not work. Netflix's dividends/profits will evaporate if they don't grow to respond to Amazon Prime Video, HBO streaming, Disney streaming, Apple TV, etc. Yes, an "old-economy" business like railroads with little competition can pay dividends but Netflix is not that type of company. All the video streaming businesses are still furiously competing for consumers' discretionary entertainment budget. To not grow is to die because your customers leave for other more attractive video offerings.

E.g. in 2002, Netflix went public and had $272 million in revenue[2]. If Netflix adopted the "we don't believe in growth" and just simply collected the same $272 million every year until today, they would not have been able to offer $100 million to buy House of Cards in 2011. This means HBO or Amazon would have outbid them making Netflix less attractive for new memberships or existing members to renew. In 2011, Netflix could afford paying $100 million because 2010 revenue already exceeded $2 billion. Because they grew.

Ok, so let's say we hypothetically rule out expensive bidding wars to license content. You still need growth instead of a flatline revenue of $272 million for the next 18 years. Your employees want their salaries to grow with merit increases, bonuses, etc -- because their apartment rents, food costs, car insurance, etc go up. The existing content partners will want increased payments to license their shows when contract renewal comes up. The rent of office space leases, electricity, health insurance, etc all go up. Increasing salaries, license costs, fixed overhead costs, etc will subtract more and more from that "no-growth-just-the-same-$272 million-revenue-every-year". There will eventually be no profits left over to pay dividends.

In other words... the problem with a "no growth ideology" is that the world out there may not want to cooperate with you! They have their own agendas.

[1] https://external-preview.redd.it/Hfg1XQCVUlO2Og1_d9iSi0Ovekj...

[2] https://en.wikipedia.org/wiki/Netflix#Membership_fee,_Blockb...

> we notice that profits come from Company X's purposeful activities that are desired by customers that choose to spend money with Company X instead of Company Y.

Many companies make money from activities that are not desired by customers.

>Many companies make money from activities that are not desired by customers.

I wasn't making some absolutist 100% statement about every company that ever existed. Sure, hated companies like cable company Comcast or Ticketmaster have profits. Netflix doesn't have that sort of monopoly power. Also, my comment about "desire" is relative desire between choices of spending money on different companies -- X vs Y.

Why did Netflix lose subscribers?[1] Because the video streaming customers desired something else.

Likewise, Blockbuster's old customers hated the late return fees. Blockbusters customers also desired the convenience of video streaming instead of driving to rent a physical DVD disc. Blockbuster lost so many customers that they went bankrupt.

Neither Blockbuster nor Netflix can irritate customers in the name of profits the same way Comcast can. A video DVD rental or video streaming's platform has way less customer lock-in or loyalty than a cable company's monopoly of physical coax lines into residential homes.

[1] https://www.google.com/search?q=netflix+lost+subscribers

While netflix doesn't have a monopoly on tv shows, they do have a monopoly on a given show. If you want to watch Tiger King, you have to have Netflix.

However even that monopoly falls down once legalities are ignored. In the 90s the only way to watch US shows in the UK was via the internet, so that's what I did. If netflix introduces adverts, then people will use piratebay or whatever to watch it without adverts.

Netflix can grow by getting more users by offering attractive services and features instead of advertisements.

Even if they stop getting new users, and just maintain their current user base, what is so bad about that? Nobody is going to go broke from that.

>Netflix can grow by getting more users by offering attractive services and features instead of advertisements.

I wasn't suggesting that it was desirable for Netflix to show ads. I was replying specifically to the "growth for growth's sake" because it's misleading.

As for "Netflix can grow by getting more users by offering attractive services and features", that's circular reasoning. They need growth to help pay for new attractive services and features.

>Even if they stop getting new users, and just maintain their current user base,

The problem is that their none of their existing user base signed a 30-year irrevocable contract to always pay $11.99 for the next 360 months. Consumers have free will and their preferences change which is why Blockbuster couldn't count on their old customers to keep walking into their stores to rent DVDs.

In other words, the "just maintain their user base" doesn't mean anything because customers have their own agenda of how they make changes in spending discretionary entertainment dollars. E.g.: https://www.google.com/search?q=netflix+lost+subscribers

> As for "Netflix can grow by getting more users by offering attractive services and features", that's circular reasoning. They need growth to help pay for new attractive services and features.

Growing is exactly what investors money is for, besides their monthly revenue that allows them to grow a bit every period of time X.

> The problem is that their none of their existing user base signed a 30-year irrevocable contract to always pay $11.99 for the next 360 months. Consumers have free will and their preferences change which is why Blockbuster couldn't count on their old customers to keep walking into their stores to rent DVDs.

That's a problem for when netflix loses users at a rate that will damage profit rates unacceptably, not before.

> E.g.: https://www.google.com/search?q=netflix+lost+subscribers

They lost market share because Disney+ has exclusive content Netflix doesn't and some users preferred to only maintain one service, there's nothing Netflix can do about it besides trying to make their product _more_ attractive, not less.

You could argue that maybe they could regain market share by making the product cheaper, but I doubt they will ever achieve a cheaper enough price where people would be willing to pay for both Netflix and Disney+/Other streaming website with more attractive content for them or switch back to netflix because it's become trash without an interesting catalogue and full of ads for being so cheap.

Reply on news.ycombinator.com